Wisconsin BJR Protects Directors, Not Bank Officers

Issue: Whether the Federal Deposit Insurance Corporation acting as Receiver (FDIC-R) is barred from suing the former bank directors and officers (D&Os) of failed First Banking Center for negligence under Wisconsin’s business judgment rule.

Case Summary: A Wisconsin federal district court ruled that the FDIC-R can sue two former officers of failed First Banking Center for ordinary negligence because Wisconsin’s business judgment rule does not shield them from liability.

The FDIC-R brought the suit alleging that the former D&Os of failed First Banking Center were negligent and breached their fiduciary duties when they approved seven loans that caused at least $11.8 million in damages.

In their motion to dismiss, the directors argued that the business judgment rule under Section 221.0618(1) of the Wisconsin statutes protects them from liability of negligence. Additionally, the officers argued they are similarly protected under the common-law business judgment rule. The officers also relied on the Wisconsin Supreme Court’s ruling in Data Key Partners. In that case, the court held that that the business judgment rule under Section 180.0828(1), a parallel statute involving non-bank corporations, applies to both directors and officers.

The Wisconsin district court dismissed the FDIC-R’s negligence claims against the 12 former directors on the basis that Wisconsin’s business judgment rule shields them from liability of negligence. However, the court ruled that the two former officers were not protected and must face the FDIC-R’s ordinary negligence claims.

In reaching its decision, the court held that the Data Key Partners ruling did not substantively discuss protection for officers and was not essential to the holding. The court concluded that “although the court must abide by Supreme Court of Wisconsin holdings regarding Wisconsin law, the language at issue was dicta because it occurred in relation to Data Key’s claims against majority shareholders, not officers.” The court also dismissed the officers’ argument for protection under a common-law business judgment rule.

Bottom Line: Although the ruling is limited to Wisconsin, the decision weakens the personal liability protection of bank officers.